Ilargi: As the financial world follows its best month in the markets in a long time with a spectacular fall on fears that the people of Greece may actually get a say in their future through a referendum (the reactions from the Merkels and Sarkozy's are at the very least amusing, even if downright scary too), Ashvin looks at the words that have been and are being used throughout the crisis by politicians and pundits alike. Here's a guide to what these words really mean.
The Tower of Babel, according to the Book of Genesis, was an enormous tower built in the plain of Shinar.
According to the biblical account, a united humanity of the generations following the Great Flood, speaking a single language and migrating from the east, came to the land of Shinar, where they resolved to build a city with a tower "with its top in the heavens...lest we be scattered abroad upon the face of the Earth."
God came down to see what they did and said: "They are one people and have one language, and nothing will be withholden from them which they purpose to do." So God said, "Come, let us go down and confound their speech." And so God scattered them upon the face of the Earth, and confused their languages, and they left off building the city, which was called Babel "because God there confounded the language of all the Earth."(Genesis 11:5-8).
"No one gets angry at a mathematician or a physicist whom he or she doesn't understand, or at someone who speaks a foreign language, but rather at someone who tampers with your own language." -Jacques Derrida
Even the mainstream press can no longer ignore the fact that the mainstream dialogue in the world of finance has become nothing more than an endlessly reduced, reused and recycled cloud of type-cast words. I first visited complex human language and its modern-day "meaning" [or lack of it] in Language, Logic and Lies, which focused on the UN Resolution to invade Libya. There we saw that statements asserted as true, according to the "logical positivism" of Alfred Jules Ayers, don't have any meaning unless they are tautologies or are empirically verifiable.
Since then, our coherence-starved language has been reflected even more fundamentally by the volatile action in markets over the last two months, during which an assortment of European headlines, rumors, "communiques" and random statements came to dominate the collective psyche of investors. The "final" EU Summit to end all Summits (sound familiar, Europe?) on Wednesday (October 26) predictably turned out to be just another feebly-constructed stepping stone in our vast sea of contradictions and double or triple-meanings that permeates a never-ending, mind-numbing game of WordCraft.
Here are some of the most painstakingly recycled words that were involved - Leverage, Haircuts, Guarantees, Bondholders, SPIV (combination of recycled words), Restructuring, Recapitalization, Voluntary, Default, Solution.
Jacques Derrida, the [in]famous French "post-structuralist" philosopher, popularized the process of Deconstruction as a means of analyzing academic literature across the human sciences. More accurately, deconstruction is an endogenous process that occurs within a work, typically finding its roots in the contradictions or omissions of the work's periphery, which then creep along towards its core and devour the entire argument. From the perspective of systems theory, it could be analogized to a process by which certain evolutionary systems sows the seeds of their own destruction over time.
Derrida's most oft-quoted phrase is "there is nothing outside the text", which meant that all "signs" (sounds, writings, pictures, videos, etc.) involved in human communication rely on an endless spiral of subjective context to imbue them with meaning, rather than reference to an external, "objective" reality that exists independent of the signifier. That may come off as a radical and ephemeral concept, but it's practical significance is painfully evident in modern society.
Derrida's Deconstruction takes a microscope to these signs, not to figure out what they truly mean or how to destroy their meaning, but to show how their meanings are naturally unraveling in the depths of our minds. Entire theories and academic arguments can be toppled by the context in which their signs are used, as that context may reveal any number of internal contradictions and circular, self-referential "terms of art".
Derrida's critics may claim that he is sitting comfortably in an ivory tower of "nihilistic" philosophy, willfully ignoring the plain-as-day "objective" meanings communicated by people in the "real world" on a regular basis. It is indeed counter-intuitive to think that what typically passes as "normal" social interaction or communication in our world is actually an elaborate, yet feeble sandcastle, patiently waiting for its moment to be washed back into the sea. That, however, is exactly the dynamic which we see in modern society.
The vocabulary of structured finance and "crisis response", those haunting specters which mask the "real world" to form an impenetrable membrane, has become more abstract and more ephemeral than post-structuralist linguistic philosophy could ever hope to be. Beyond that, we are all also becoming more consciously aware of this reality on a daily basis as the paradoxical headlines unravel and filter through. We now merely sit back and watch the global economic and financial system face the wholesale deconstruction of its internals.
Indecent Bazaar: Derrida's Passion for the Impossible
Up to this point, and for more days/weeks to come, the structural flaws and gaping holes in the latest European "bailout" proposal have been analyzed to death by every multi-national parent corporation and all of their subsidiaries. As expected, very few details were actually provided on any of the key issues allegedly negotiated for days in a set of marathon Summits. Anything that could possibly shed some light on what exactly was agreed upon and how it can be accomplished will now only come in the upcoming weeks of November, at the earliest.
The sovereign debt markets have not taken kindly to the plan to make a plan, as Spanish and Italian bond yields continue to leak upwards. This article is not about re-hashing a previously conducted accounting analysis of a relatively non-existent plan (though some limited analysis will be included). It's about why every such iteration of the latest grand master plan will perpetually fail to provide any coherent and comprehensible "solutions" for our global economic predicament.
It's about using a specific example to establish an extremely general underlying point. One can label the argument a type of "doomerism" or "nihilism" if one wishes, but I suspect most readers have already recognized its significance in their own lives. Now, our systematic deconstruction of the "comprehensive and sustainable solution" out of Europe last week must start with the oft-cited "origin" of the sovereign debt crisis, Greece. Yet another bombshell has been dropped on European leaders and this time it comes from the Prime Minister of Greece, George Papandreou.
On Monday evening, G-Pap announced that the European plan allegedly agreed upon last week would not be accepted or implemented until it was put to the Greek people in a referendum. Make no mistake, this one could be a terminal blow for the EMU. Regardless of what the Greek people vote to do (odds are not in favor of them voting for more debt slavery), or whether this referendum even occurs, G-Pap has just signaled that he is more than ready to give up on the pan-European Pipe Dream.
Greek PM Calls Referendum on EU Debt Deal"The plan of initiatives calls for a confidence vote," Papandreou told his Socialist party lawmakers in parliament, moments after he had also announced a referendum would also be held on the EU deal. "The command of the Greek people will bind us," he said.
"Do they want to adopt the new deal, or reject it? If the Greek people do not want it, it will not be adopted," the prime minister said after protests were held around the country last week against his government's austerity policies."
The call for a referendum is an unprecedented move which tells the rest of Europe that the Greek Prime Minister trusts (or fears?) his own people much more than those other leaders attempting to impose economic reform on Greece from the outside, and that there will no be no "comprehensive" anything without the blessing of the average Greek citizen. Needless to say, this development was not anticipated by the EU leaders congregating last week, and it will completely undermine everything they had agreed to agree upon in the future.
Instead, the birthplace of democracy will be granted the right to exercise that democracy in perhaps the most important referendum ever held in the developed world. Like I said before, the odds are not looking good for a unified Europe, as depicted in the picture above and many similar ones. But leaving that issue aside for now, as European rumors and counter-rumors will continue to incessantly filter through the headlines, let's move on to deconstructing the "plan" even further, under the generous assumption that it will survive a Greek referendum in the near future.
1) The plan calls for the € 440 billion in capital already pledged to the EFSF, €290 of which is still unencumbered, to be "leveraged" into €1 trillion by providing "first-loss guarantees" on sovereign bonds of distressed members (PIIGS) for private investors and/or raising capital from outside investors (private institutions, sovereign wealth funds, etc.) through a "Special Purpose Investment Vehicle" (SPIV)
Let's start with the word "leverage". Right off the bat, we are discussing a term with dual connotations, as it could imply an amplifying effect that allows extra work to be done with relatively small amounts of force, or it could imply a destructive trait of developed economies that greatly increases systemic risks. In the eyes of EU political leaders, it carries the former positive connotation, but it carries the exact opposite in the eyes of the German Central Bank and a portion of the European Central Bank:
Eurozone Bail-Out: Holes Emerge in the 'Grand Solution’ to Solve EU Debt Crisis"Jens Weidmann, the president of the Bundesbank and a member of the European Central Bank, sounded the alarm over the plan to “leverage” the fund by a factor of four to five times without putting any new money into the pot.
“It is tied to higher risks of losses and to increased sharing of risks,” said Mr Weidmann. “The way they are constructed, the leveraging instruments are not too different from those which were partly responsible for creating the crisis, because they concealed risks.”
The already ambiguous "leverage" term, that could signify two diametrically opposed forces, is proposed to be accomplished in one of the following two ways, or maybe both (no one knows yet):
a. The "first-loss guarantees" will be established by EU member states who agree to take a percentage of initial losses on peripheral bonds which are in "default".
What this scheme amounts to is the EFSF "guarantors" providing private investors with partial insurance on peripheral bonds, which will allegedly lower borrowing costs for the distressed states involved. Since a country cannot credibly sell insurance on its own bonds to lower costs (unless it's the U.S. doing it via the Fed and Primary Dealer banks), the guarantors will only be those states that are not in the process of drawing on the EFSF for aid.
The glaring contradiction in this proposed method of leveraging the EFSF through "guarantees" is found in the context of another part of the plan which deals with Greece. That part makes clear that a "50% haircut" [to be discussed more below] for holders of Greek bonds is not a technical "default" that triggers payouts on bond insurance contracts, i.e. credit default swaps. This is currently the position supported by the International Swaps & Derivatives Association (ISDA). The Wall Street Journal's Serena Ng and Katy Burns report on this gaping conundrum:
Default Insurance Market Takes Hit"A vast market in which banks, hedge funds and investors trade insurance against debt defaults got a jolt Thursday, sparking worries of new strains in the global financial system. Under the broad deal reached this week to stem the euro-zone's financial crisis, holders of credit-default swaps on Greek government bonds aren't expected to receive any payout, even though a preliminary agreement between financial institutions and European policy makers would recognize just half the face value of some Greek debt.
"The decision not to trigger the swaps raises questions about the value of the insurance-like contracts and exposes the limitations of the hedging strategies that banks and investors have come to rely on. The swaps are widely used by bondholders and major banks to defuse a wide range of risks, and by traders to bet on market trends. If the swaps don't pay out when bonds default, banks and funds that bought the insurance may face losses they thought they had hedged."
Bloomberg's John Glover adds a bit to to the discussion as well:
Greece Default Swaps Failure to Trigger Casts Doubt on Contracts as Hedge"If they find a way to avoid a trigger event in the CDS, then people will doubt the value of credit-default swaps in general, leading to more dislocations in the market," said Pilar Gomez-Bravo, the senior adviser at Negentropy Capital in London, which oversees about 200 million euros. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements."
What seems to be missing in this discussion is the fact that the exact same logic can be extended to the EFSF bond insurance program, where "guarantees" are the equivalent of "insurance-like contracts" and would not have to be paid out as long as the remaining PIIS can restructure without technically "defaulting". There's very little doubt that Ireland, Portugal, Spain and even Italy will also be seeking to "restructure" their debts in the near future, as private deleveraging and austerity kills any remaining prospects for economic growth. They will want nothing less than the same deal Greece was offered.
Given the approach that has been taken by EU leaders and the ISDA with the Greek restructuring of allegedly 50% of its debt, it would appear very likely that a "default" can be avoided for any other distressed member state by the mere use of technically-laced propaganda, and therefore the guarantors would avoid any prospect of having to make good on their guarantees. All of that is another way of saying that, by definition, there are no guarantees involved in the new plan and the fund will not be leveraged through them.
So in the process of rendering sovereign CDS self-referencing (all countries are guaranteeing each others' debts), meaningless instruments of modern finance, the EU plan has also rendered its own plan for leveraging the EFSF through bond guarantees (insurance) meaningless as well. To assume that this inherent contradiction of the new plan is lost on institutional bond investors who rely on "hedging" strategies is to make a very dangerous assumption (Italian 5Y and 10Y bond yields are making record highs as I write). There can be no confidence in a market for insurance that consists of perpetual premiums and no credible prospects for payouts on the policy.
"SPECIAL (PURPOSE) INVESTMENT VEHICLE"
b. The guarantees will be established by external investors (private institutions, sovereign wealth funds, etc.) who agree to commit capital for peripheral bond purchases into the SPIV.
Here, we must refer to the over-arching context of an established plan to boost EFSF "firepower" to witness the absurdity underlying the proposed SPIV in the new EU plan. It turns out that those agreements reached by EU leaders in the wee hours of Thursday morning actually consisted of an agreement to travel around the world, hat in hand, asking for people to invest in the most publicized ponzi scheme in human history.
To get from €480 billion in existing capital for the EFSF to a proposed €1 trillion, the new EU plan apparently relies on outside investors (primarily sovereign wealth funds) to invest in the fund and expose themselves to even more toxic European debt. How can an agreement to "leverage" a fund through a "SPIV" be reached before some of the largest investors have even agreed to participate? It can't, and that's a fact weighing heavily on markets now, since China has once again said it will not be Europe's savior [Global Imperatives of a Chinese Exporter]. Al Arabiya News reports:
China's State Media Said Cash-Rich Country Won't Save Europe"China’s state media Sunday warned that the country will not be a “savior” to Europe, as President Hu Jintao left for an official visit to the region including a G20 summit.
Hu’s visit has raised hopes that cash-rich China might make a firm commitment to the European bailout fund, but in a commentary, the official Xinhua news agency said Europe must address its own financial woes. Europe is seeking to expand the European Financial Stability Facility (EFSF) to one trillion euros ($1.4 trillion), possibly through a special purpose investment vehicle or the International Monetary Fund.
China, holder of the world’s largest foreign exchange reserves at $3.2 trillion, said it wanted more clarity before investing in the bailout fund after head of the EFSF Klaus Regling, held talks in Beijing to try to win help."
More clarity, indeed. That's what everyone wants now, but they're never going to get it. The only thing that will be clear is that there cannot be any clarity in this world of WordCraft. China is well aware of this fact, and so are the major contributors to the IMF. The US is too politically volatile to bail out Europe in the approach to 2012 elections, the U.K. has already said it will not bail out Europe "directly or indirectly" and Germany has also made clear that its current contribution to the EFSF will not increase. Did anyone really think it would get around that promise through use of the IMF without the world taking notice?
2) EU leaders have announced banks must "recapitalize" their balance sheets in the amount of ~€106 billion before June 2012 (Tier 1 capital ratio of 9%), by first seeking capital from private investors and then handing the beggar's bowls to their respective governments and/or the EFSF.
This aspect of the plan is perhaps the most circular and confounding. First of all, the estimate of what amount of capital is needed for the banks apparently materialized in the minds of EU leaders in the dead of night, like the ghost of Lehman's past. The IMF had previously put this figure at €200 billion, while a few of the banks themselves (granted, American banks) estimated the figure to be anywhere from €400 billion to €1 trillion (the size of the entire "leveraged" EFSF, if it were to ever materialize from pure hopium and desperatium into reality).
Second, this part of the plan is not really a plan to respond to the sovereign debt crisis enveloping Europe at all, but simply to tell European banks what they need to do, i.e. raise cash. How should they raise this cash? Well, that's still anybody's guess. They could go to the private capital markets, but the whole problem for the banks is that they are being progressively locked out of these markets as the reality of their exposure to deteriorating sovereign bonds becomes more clear. The plan to allegedly eliminate 50% debts owed by Greece (discussed below), to be followed by the rest of the Euro periphery, doesn't really help this cause either.
The other option is for the banks to go to European governments for capital directly, or indirectly through the EFSF, which, as explained above, is essentially a fund that consists of defunct "guarantees" from a bunch of tiny and/or insolvent countries, France and Germany. Simply put, this "option" is actually not even an option at this stage of the game, and so the banks are once again left to their own tricky devices for now. Bloomberg Business Week reports (and the article's title really says it all):
Europe Tries to Recapitalize Banks Without Injecting Capital"European Union leaders ordered banks last week to increase the ratio of “highest quality” capital they hold by the end of June, creating a shortfall of 106 billion euros ($148 billion). Of Europe's 28 largest lenders, only eight will need to raise a total of 11 billion euros from investors, Huw Van Steenis, a Morgan Stanley analyst, wrote in an Oct. 28 report.
Rather than tapping investors or governments, firms are trying to hit the 9 percent core capital target by adjusting risk-weightings, limiting dividends, retaining earnings, reducing loans and selling assets. Banks had threatened to curb lending, risking a recession, to meet the goal rather than take government aid that would bring limits on bonuses and dividends."
Of course, both the banks and the governments are trying to spin this situation as one in which the governments have capital ready to hand out, as long as certain conditions are met, and the banks have the luxury of saying "no" to government aid, since they have their own resources to deploy and clever business strategies to pursue. The reality is that neither of those situations exist (the latter hasn't existed since 2008), and both the governments and the banks are simply consuming themselves with circular words and logic. There will be no systemic bank "recapitalizations", only systemic bank failures.
HAIRCUTS, VOLUNTARY, RESTRUCTURING
3) The plan calls for Greek "bondholders" to accept "50% haircuts" on the value of their bonds as a part of a "voluntary restructuring" of Greece's sovereign debt obligations.
Now here's a slice of WordCraft that couldn't be any more devoid of meaning than it already is. The term "bondholders", in almost any context, means all of the individuals or institutions which own the debt obligations of another individual or institution. Many times they are broken down by class according to seniority privilege or level of security. What that translates to in the new EU plan is a term that encompasses only a small fraction of those holding Greek bonds by value. Grant Williams explains:
Grant Williams: Things That Make You Go Hmmm"Greece’s debt is roughly €350 billion. Of that, approximately €150 billion is held by the ‘Troika’ (including the €75 billion held by the European Central Bank) and this €150 billion is NOT subject to the haircut imposed on private holders of the debt. So that leaves us with roughly €200 billion.
Greek banks and pension funds account for (give or take a billion or two) another €85 billion and, though many number-crunchers apply the haircut to this slice of the debt pie, my own feeling is that it is untouchable as, if they are NOT ring-fenced these holders will be bust should they be forced to take the proposed haircut.
By my calculations, that leaves €115 billion needing to be ‘forgiven’. Apply the haircut to that number and you are left with a reduction in Greek debt of €57.5 billion - or 16%".
The point is not to figure out exactly how the new plan defines "bondholders", or what the "haircut" will actually be, but to recognize that the term can be subjectively twisted to have almost any meaning whatsoever, depending on who is doing the twisting, when they're doing it and to what aim. Now moving on to the term "voluntary", it is the most basic tenet of common contract law that an obligation made or modified under physical or economic duress is not enforceable.
However, what specific set of facts actually amounts to "duress" is not clear, especially in the relatively rare circumstances that have paradoxically become the normal circumstances of our financial environment these days, and especially in Europe. Does the threat of full-blown financial Armageddon count as a factor establishing the existence of "duress"? Maybe, maybe not. Regardless, that's exactly what was admitted to being threatened by EU leaders in the following statement, as Business Week reports:
Banks Were Persuaded by Leaders' Threat on Default, Juncker SaysJean-Claude Juncker, President of the Eurogroup:
"It was the fiercely rendered wish by the people, Merkel, Sarkozy, Juncker, that if a voluntary agreement with the banks was not possible, we wouldn’t resist one second to move toward a scenario of total insolvency of Greece, which would have cost states a lot of money and which would have ruined the banks."
That, then, is the state of "voluntary" financial decisions we are left with after some bureaucrats emerged from a hotel last week. It is no different from the one we had when Hank Paulson set foot in the U.S. Capitol Building in 2008, or when Merkel cautioned us not to take peace in Europe for granted before the last Summit began. The only difference now is that more time has passed, and more divisions have arisen between banks, the people and politicians. Greece couldn't make it to a 90% participation rate when the "haircut" was set at "21%", so good luck repeating the same mistake at "50%".
So, let's finally turn our attention to the last word relentlessly flaunted about in our hallowed game of financial WordCraft - "solution". It is a sad, yet undeniable fact that, what EU officials and politicians hail as a "solution" to the European sovereign debt crisis, many working-class people and factions of the populist media in the towns of Greece analogize to "the final solution" of Nazi Germany. They see European leaders endlessly convening in meetings and issuing "statements" while the people continue to suffer.
Who is "Angela Merkel", anyway? Is she the solemn Chancellor of Germany trying her hardest to maintain a peaceful Europe "united", or is she simply the modern-day reincarnation of the Führer, Adolf Hitler, guiding Germany's 21st-century version of the Third Reich? Yes, that's a shallow question to ask, but the point is that it's nevertheless a question on a lot of down-trodden minds. We can either dismiss its underlying reality and gloss over it with meaningless rhetoric, or embrace it and understand it. Perhaps the new Greek referendum will help mitigate the discontent, but only time will tell that tale. From the Daily Mail:
Furious Greeks Lampoon German 'Overlords' as Nazis With Picture of Merkel Dressed as an SS Guard"Newspaper cartoons have presented modern-day German officials dressed in Nazi uniform, and a street poster depicts Chancellor Angela Merkel dressed as an officer in Hitler’s regime accompanied with the words: ‘Public nuisance.’
...Opposition parties blasted the landmark agreement, with conservatives warning it condemned the country to ‘nine more years of collapse and poverty’. But it is the fury of ordinary Greeks which is raising eyebrows.
Greek government officials who agreed to the belt-tightening moves have been portrayed in cartoons giving the Nazi ‘Sieg Heil’ salute. And German visitors flocking to ancient tourist sites are being met with a hostile welcome from some Greeks."
Let's take those sentiments and apply them to every President, Prime Minister, and elected or appointed figurehead and scatter them throughout every major city in the developed world, because that is the reality we are now face to face with. The Greek and German WordCraft is no different from that of Spain, Italy, France, China, Japan, the U.K. or the U.S., and their hollow reverberations are simply failing to wash over the fearful and loathsome minds of the dejected masses.
Hateful rhetoric, mass protests, violent riots and unrelenting strikes - those are the consequences we reap from weaving our meta-narratives with such chillingly empty words. Talk is cheap, but it is still proving too expensive for a world without economic growth and without any sense of lasting confidence or trust. At a certain point, the human intellect can no longer function inside Schrodinger's box of self-referential labels and cannot continue playing games in our world of WordCraft.
We will always be disappointed with what is presented as a "solution", we will always be frustrated with the lack of meaningful "progress" and we will always be angry at those who refuse to let us outside of the box. There will be no satisfaction found in this virtual existence of binary outcomes, political avatars and manufactured meaning. Only when the system's structures are fully deconstructed will we find any relief in the language and meanings of our future.
"Whatever precautions you take so the photograph will look like this or that, there comes a moment when the photograph surprises you. It is the other's gaze that wins out and decides."